Economist: Oil tax and government liquidity don’t mix

Economist Heidie Calero is the founder of the firm that puts out the monthly “Pulse” publication.

The strategy set forth by Gov. García-Padilla’s administration to try shore up liquidity for the Government Development Bank for Puerto Rico through the reliance on a recently approved oil tax hike may fall short if prices increase, or the island’s population continues to shrink, economist firm H. Calero Consulting exposed in its most recent monthly publication.

In the March edition of “Pulse,” the firm said mixing oil and Puerto Rico’s liquidity issues is a “dangerous strategy,” given its reliance on two volatile elements.

“In principle, taking advantage of relatively low oil prices to increase tax revenues based on oil-related products is a good idea. However, should prices increase, the drawdown on taxes could take up to a year to materialize and a could exacerbate outward migration,” the firm said.

On average, a 1 percent contraction in population leads to a 14.4 percent reduction in total oil-linked tax revenues — around $70 million, the firm said.

“Thus, the scenario in which oil prices remained low and population continued to contract would unavoidably kick in a hike on taxes for oil-based imports, by far, the worst possible scenario,” H. Calero Consulting said.

Earlier this year, the legislature passed — and the governor signed — a law known as “La Crudita,” which raised the excise tax on oil-derived products by 68 percent, taking it to $15.50 per barrell, effective March 15th.

The revenue collected would be be used to cover a yet-to-materialize $2.2 billion bond issue to be used to pay off the Puerto Rico Highway and Transportation Authority’s outstanding debt with the Government Development Bank, whose liquidity has been severely crippled in the last six months, contracting by 35 percent between October 2014 and February 2015.

“Since 2006 the exacerbation of the island’s public corporations’ dependency on the GDB has strained the bank’s balance sheet,” the firm said, noting that as of Sept. 30, 2014, the GDB had $1.9 billion outstanding loans to the Commonwealth.

The GDB’s total loans to public corporations amounted to $4.5 billion, including the PRHTA’s $2 billion obligation.

“The currents efforts to save GDB’s liquidity position are not without some significant risks, including a shift in global oil markets. For example, in an effort to control emissions, U.S. regulations have been very successful in increasing fuel efficiency in cars,” H. Calero said in its analysis. “This implies that while oil and gasoline prices are trending down, a reduced number of consumers combined with more efficient vehicles could lead to a slowdown or even a reduction in the physical consumption of oil.”

Even if the GDB’s short-term liquidity issues were solved, a shrinking population would still limit the agency’s long-term lending prospects, the firm concluded.

“It still remains unclear how distressed public corporations will become financially sustainable. Resizing of public corporations and government agencies may be inevitable. That moment may just be closer than most would like to admit,” the firm said in its publication.